Direct taxes include?

Analyze the question: The question asks which of the options is a direct tax.

Concept:

• A direct tax is levied directly on the income or wealth of a person or organisation. The person who is legally responsible for the tax also bears the burden, and it cannot easily be shifted to someone else. Examples: personal income tax (PAYE), company income tax, capital gains tax, capital transfer tax, and property or inheritance tax.
• An indirect tax is levied on goods and services. The burden can be passed on to consumers. Examples: excise duty, import duty, VAT, sales tax.

Solution:

• A. Excise duty is charged on goods produced within a country, such as beer and cigarettes. The producer passes it on to the consumer in the price, so it is indirect.
• B. Ad valorem tax is a tax calculated as a percentage of the value of a good (for example, 10% of the price). It is a way of calculating a tax and is usually applied to goods, so it is indirect.
• C. Specific tax is a fixed amount per unit of a good (for example, ₦5 per litre). It is also applied on goods, so it is indirect.
• D. Capital gains tax is charged on the profit a person makes when selling an asset such as land, shares or a building. It falls directly on the person who makes the gain, so it is direct.

Answer: D. Capital gain tax

Exam tip: Ask yourself, "Is the tax taken from a person's income, profit or wealth, or is it added to the price of a good?" If it comes from income, profit or wealth, it is direct. If it is added to the price, it is indirect. A quick way to remember is that direct taxes follow the person, while indirect taxes follow the goods.